The Scandal Of Healthsouth Corporation Scandal

HealthSouth Corporation was incorporated in January 1984 in Birmingham, Alabma by the founder Richard M. Scrushy. HealthSouth Corporation is the leading provider of medical rehabilitation health care and outpatient surgery services in the United States. Richard M. Scrushy was the former CEO& Founder of HealthSouth Corporation, and there were 5 CFO which were Aaron Beam, Weston, Smith, Bill Owens, Michael Martin and Tadd Mcvay.

HealthSouth grew rapidly during the 1980’s and 1990’s. This growth was largely due to acquisitions. HealthSouth owned more than 330 hospitals worldwide. It was also during this time that Scrushy became known as one of the highest paid CEOs in the United States.

In addition, associated with the misapplication of accounting methods, the financial industry has been plagued with one disaster after another involving numerous scandals from top leading American companies. Consequently, the Sarbanes-Oxley Act was passed in 2002 compromising eleven sections that are generated to insure the responsibilities of the company’s managers and executives. This act identifies criminal penalties for particular unethical practices and currently has new policies that a corporation must follow in their financial reporting. The following examples describe some of biggest accounting methods as a result of the greed and the outrage of the ethical and financial misconduct by the senior management of public corporations.

The story of HealthSouth begins with two of the most well know founders. Richard Scrushy was a bold, charismatic man of middle-class beginnings. He would rise from a mason to one of the highest earning CEO’s in the country due mainly to his ability to drive, charm, and manipulate those around him. Driven by the desire to attain wealth and status Scrushy was hired in at LifeMark where he rose through the ranks as a result of his unbridled competitive nature and workaholic tendencies.

A forensic audit conducted by PricewaterhouseCoopers concluded that HealthSouth Corporation 's cumulative earnings were overstated by anywhere from $3.8 billion to $4.6 billion, according to a January 2004 report issued by the scandal-ridden health-care concern. HealthSouth acknowledged that the forensic audit discovered at least another $1.3 billion dollars in suspect financial reporting in addition to the previously estimated $2.5 billion. The scandal 's postmortem report

In the later part of 1990s, there was an epidemic of accounting scandals which arose with the disclosure of financials transgressions by trusted corporate executives. The misdeeds involved misusing or misdirecting funds, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities, and overstating of revenues.

Between the years 2000 and 2002 there were over a dozen corporate scandals involving unethical corporate governance practices. The allegations ranged from faulty revenue reporting and falsifying financial records, to the shredding and destruction of financial documents (Patsuris, 2002). Most notably, are the cases involving Enron and Arthur Andersen. The allegations of the Enron scandal went public in October 2001. They included, hiding debt and boosting profits to the tune of more than one billion dollars. They were also accused of bribing foreign governments to win contacts and manipulating both the California and Texas power markets (Patsuris, 2002). Following these allegations, Arthur Andersen was investigated for, allegedly,

Financial management of health care organizations can be a complex challenge for health care managers, from the basic elements of financial management to the heavy burdens of ethical compliance and accuracy. In this paper the subject to discuss is financial reporting practices and ethical standards in health care, how health care reform is changing and making these organizations more accountable, and summaries of generally acceptable accounting principles and general financial ethical standards.

Weston Smith (2013), former CFO of HealthSouth, states “the tone of the company may be memorialized through policies and procedures, both written and spoken, but nothing sets the tone more than the everyday actions of the leadership.” At the top of the HealthSouth organization sat Richard Scrushy. As founder and CEO of the company who instilled fear in employees that did not carry out his orders. This set the tone from the top. Do as you’re told or suffer the consequences. When financial results did not meet market expectations, managers were told to fix it. And they did by creating false journal entries and false documentation to back up those entries. There were no checks and balances in place and the accounting system was not linked to the enterprise resource planning software. There was no oversight of managers by a board of directors or an audit committee. The audit committee was not well trained, did not have enough staff, and was not independent of management. Scrushy had complete control of the company and he was obsessed with increasing his earnings trends. He reinforced the idea of top management being family and therefore more loyal to each other than to the unknown public (Lupica, 2014).

As the WMI accounting fraud case shows, change exposes organizations to considerable financial fraud risks. The top officials used acquisitions and merger as means to perpetuate this fraud. This financial fraud took place due to the organizational breakdown of internal and external audit controls. As a result, the top management was able to commit this massive fraud without facing any resistance. It never occurred to them that they were violating the law because what mattered to them was pocketing as much as they could.

With the avalanche of accounting scandals that have rocked the public, people tend to have increasingly high expectation that auditors are accountable for detecting all frauds, while the standards require auditors to provide reasonable, but not absolute, assurance. The purpose of the report is to discuss the accountability of auditors in detecting fraud by analysing a $16.9 million fraud of Otago District Health Board (ODHB) perpetrated by Swann and Harford from 2000 to 2006. The report will explain the event, the fraud, the stakeholders, the role of auditors and the current situation.

Many employees and investors were negatively impacted and hurt by Scrushy’s lies. Many, if not all, of the employees that were involved with the family meeting and fraud lost their jobs, were fined and sentenced to time in prison. Scrushy himself was fired and was fined. Scrushy had an income of over 300 million and when he was found guilty for the actions at HealthSouth he was fined 2.9 billion in repayment to the company (Former). This massive fine left Scrushy unable to even pay his own prison housings. The HealthSouth Scandal was the first scandal to be tried with the Sarbanes-Oxley Act. The Sarbanes-Oxley Act “carried stiff penalties and prison time for white-collar criminals” (Scrushy). The downfall of HealthSouth became a large warning to other companies to avoid fraud because the Sarbanes-Oxley Act is unforgiving and harsh. After HealthSouth was exposed, questions began to rise about HealthSouth’s independent auditors, Ernest and Young. On a particular audit, it was “unclear if Ernest and Young failed to identify the fraud or they were intentionally ignoring it” (HealthSouth Scandal). HealthSouth fired Ernest and Young soon after a deeper investigation by PricewaterhouseCoopers. PricewaterhouseCoopers “carried out a forensic audit and uncovered the facts and figures of the fraud” (“HealthSouth Scandal”). After this discovery, PwC replaced Ernest and Young and became HealthSouth’s new auditors.

On March 19 of the year 2003, Securities and Exchange Commission brought the trading of HealthSouth to an end on the New York stock exchange, charging the company for inflating its earnings by more than 10 percent and overstated its profits by more than $2.5 billion between 1999 and 2002. HealthSouth’s trading reached to $30.81 in the year 1998, but ever since the trading of the company has been put to an end it reached to $3.91 per share. One week later, Owens pleaded guilty to changing and editing the company’s financial statements.

A number of financial statement frauds went undetected from auditors in past and attracted a high profile attention. The businessmen add fake assets or transfer the assets of companies to their personal assets and result in accounting scandals when the affected companies are bankrupted or are even close of bankruptcy. Just to mention a few names, accounting scandals of Enron, AOL Time Warner and Xerox are among the hottest accounting scandals of the century. This means that despite presence of professional auditors accounting scandals happen and there is a need to learn from the mistakes of the auditors who overlooked these activities. In this report the case study of Xerox is analyzed in detail to highlight violations of accounting principles and present an example from which lessons can be learnt for the future.

Cable provider Adelphia was one of the major accounting scandals of the early 2000s that led to the creation of the Sarbanes-Oxley Act. A key provision of the Act was to create a stronger ethical climate in the auditing profession, a consequence of the apparent role that auditors played in some of the scandals. SOX mandated that auditors cannot audit the same companies for which they provide consulting services, as this link was perceived to result in audit teams being pressured to perform lax audits in order to secure more consulting business from the clients. There were other provisions in SOX that increased the regulatory burden on the auditing profession in response to lax auditing practices in scandals like Adelphia (McConnell & Banks, 2003). This paper will address the Adelphia scandal as it relates to the auditors, and the deontological ethics of the situation.